Protecting Home Equity with Chapter 13
If you’re struggling to keep up with mounting consumer debt but own your home, you may be interested in filing for bankruptcy, but concerned about what might happen to your home if you do. There are ways that bankruptcy can protect the equity in your home which you spent years building. Read on to learn more about how filing for bankruptcy under Chapter 13 could protect you from losing your home.
In order to retain the equity in your home that goes beyond the amount protected by the homestead exemption when filing for bankruptcy under Chapter 13, you would need to pay as much toward your creditors as they would have received, had you filed for bankruptcy under Chapter 7. Bankruptcy under Chapter 7 is known as “liquidation bankruptcy,” since the trustee sells (or liquidates) any nonexempt assets and gives the proceeds to your debtors. The bankruptcy trustee determines what amount they might have made from a sale of your home by deducting the amount of realtor or escrow fees, title insurance, or other closing costs, along with the amount of the outstanding mortgage, and the amount of the applicable homestead exemption. For example, let’s say your home is worth $300,000. The trustee determines that the costs to sell your home likely would have been around $20,000, the outstanding mortgage is $175,000, and the applicable homestead exemption is $75,000; that means the trustee likely would have ended up with $35,000 from a bankruptcy-related sale.
In other words, if the trustee determines that they likely would have collected a profit of $35,000 to be distributed among your creditors after realtor fees and the amount of the mortgage was deducted, then you will be obligated to pay $35,000 to your creditors during your three to five-year Chapter 13 repayment plan. If a portion of this debt is non-dischargeable, such as a recent income tax debt, then it would not have been eliminated through Chapter 7 bankruptcy, so there would be no advantage to a Chapter 7 filing.
Had you failed to file for bankruptcy, you might have ended up with numerous judgment liens by creditors on your home, substantially eating into the value of an eventual sale, since you would have had to pay these debts when you sold your home. You can protect your hard-earned home equity by restructuring your debt through Chapter 13 bankruptcy, discharging a portion of your unsecured non-priority debts (ie, credit card debt) depending on your specific circumstances, and preventing additional judgment liens from attaching to your property.
If you are considering filing for bankruptcy in Southern California, speak with the experienced and knowledgeable Ventura bankruptcy lawyers at Rounds & Sutter for a consultation, at 805-650-7100.